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How to Properly Dissolve Your LLC

There are many reasons to close your business, not all of which are related to failure. Many companies begin with a specific timeline in mind; closure is a known factor from the start. Other LLCs address a particular need. With the need met, the company is no longer necessary.

Whatever the cause, there is a proper procedure for LLC dissolution. While the details are slightly different from state to state, the broad strokes are basically the same.

Types of LLC Dissolution

Dissolutions fall into three categories: judicial, administrative, and voluntary.

Judicial dissolution is issued by a court. A court can dissolve a business for failure to comply with state laws or failure to pay its taxes. More common, however, is judicial dissolution as a result of a lawsuit brought by disgruntled LLC members who wish to unravel their business ties.

Administrative dissolution is imposed by the Secretary of State's office. It is usually the result of failing to either comply with state law or file an annual report. The power of the Secretary of State, however, is broad, and in many states, an LLC can be dissolved for nearly any reason the Secretary deems fit.

Voluntary dissolution is the result of members willingly choosing to close their business. This can happen in two ways. First, members can determine certain dissolution-triggers (such as the death of a member) which are written into the LLC operating agreement. Second, members can cast a vote to dissolve the company at any time.

How an LLC is Dissolved

Dissolution is commonly misunderstood as the final step in the process of closing your business. In reality, it is only the first step.

Dissolution is achieved at the state level. You must file Articles of Dissolution (or a Certificate of Dissolution, in some states) with the Secretary of State. Once approved, your company is technically dissolved, although this is hardly the end of the line.

If your LLC conducted business in other states, you will need to also file cancellation or withdrawal documents in those states. This will ensure that you are not fined for unfiled annual reports in those states.

You will need to file a final tax return with the appropriate state agency and the IRS. Federal tax forms have a “Final Tax Return” box you can check on the form. The IRS provides a Closing Business Checklist with additional filings that must be submitted where applicable.

If you have employees, it is critical that you pay your final payroll taxes. If you fail to do so, the IRS can seek restitution from you personally, as well as from anyone who signs your payroll taxes.

Closing your Federal Employer Identification Number (FEIN) is also a good idea. This indicates to the IRS that your business is closed and will file no future taxes. An FEIN cannot be canceled, but the account to which it is attached can be closed.

Any business licenses issued to your LLC should also be canceled.

Wind-Up Measures

Closing a business is more than filing paperwork. Settling debts, disbursing assets, voiding contracts, letting go of employees and canceling leases all fall into the category of “wind-up measures.” These are the actions which must be taken to properly conclude the business of your LLC.

Wind-up measures are taken after you have filed for dissolution. Once your dissolution is approved, you cannot enter into any new business on behalf of the LLC.

Settling Creditor Claims

Many states legally require you to notify outstanding creditors when you dissolve. Creditors are allowed a specified period of time to register new debts and given a timeframe after which new debts cannot be claimed. In most states this is 120 days, but the timeframe ranges from 90 to 180.

In some states, an LLC is required to publish a dissolution notice in a local newspaper. This provides extra notice to creditors.

Distributing Assets

In addition to paying creditors, you must distribute your LLC's assets to its members. Assets are generally allocated according to a member's ownership percentage. If you have three members with a 40-30-30 ownership percentage split, then assets would normally be distributed in the same percentages.

It is possible to lay out a different rule for disbursements in your operating agreement. This should be done when your LLC is formed, however, not near the end of its life.

Assets include profits, physical properties and all financial investments.

Closing Your Doors

If you lease property to run your business, your property owner must be contacted. Most lease agreements require the lessee to pay out the remainder of the contract, but your property owner may be willing to work with you given the circumstances.

Employees and clients should be notified. Many companies overlook contacting clients. While not technically required, it is a worthwhile courtesy, especially if your LLC members intend to do business in the future within the same industry. Ending a business relationship positively will keep doors open in the future.

Final Thoughts

It is always best to plan for dissolution long before it happens. When an LLC fails to address dissolution in its operating agreement, basic state law kicks in and determines proper procedures. Standardized laws are generally written for the “average company” and will likely not suit the specific needs of your business.

Nearly every state imposes fines for walking away from LLC and failing to properly dissolve. Fines accrue over time, sometimes for as long as a decade or more. It is worth acknowledging that financial situations change over time, and dormant businesses can be reinstated. Leaving loose ends may come back to haunt entrepreneurs who want to revive their LLC sometime down the road.

About the Author(s)

Drake Forester writes extensively about small business issues and specializes in translating complex legalese into language everyone can understand. His writing has been featured on Fox Small Business, AllBusiness.com, Score.org and many other websites and blogs.